Section 83b Election

As explained below, the tax rules for restricted stock provide both an
advantage and a disadvantage when compared to the rules for vested stock. If
you don't like the trade-off, you can make the section 83b election. When
you do, you'll be treated (mostly) as if you received vested stock. But you
have to act fast: the election must be made within 30 days after you receive
the stock.

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To get the most out of this page, you need to be familiar
with the terminology and rules for receiving vested stock and
restricted stock from an employer. If you're not already
familiar with those rules, see the following pages:

Restricted stock

You don't have to report income when you receive restricted
stock from an employer. That's the good news.

The bad news is that you have to report income when the stock
vests, even if you don't sell it at that time. What's worse, the
income you report includes any increase in the value of the
stock during the vesting period. You have to report the full
value as compensation income, not capital gain.

Example:
In return for services, you receive 4,000 shares of restricted
stock in a startup company when the shares are worth $1.25.
Shortly thereafter the company goes public and is hugely
successful. When the shares vest two years later they're trading
at $50.

In this scenario you report nothing when you receive the shares, but
report $200,000 of compensation income (not capital gain) when the shares
vest. You may have to pay as much as $70,000 in federal income tax, even if
you haven't sold the shares.

Effect of the election

If you make the section 83b election, the rule described
above doesn't apply. You pay tax when you receive the stock, but
not when it vests. You'll also report capital gain or loss when
you sell the stock.

In the example above, you would report $5,000 of compensation
income when you make the election — a far cry from $200,000! You
have nothing to report when the stock vests. If you sell for
$200,000 after holding the stock more than a year you'll report
$195,000 of long-term capital gain, perhaps paying less than
half the amount of federal income tax that would apply without
the election. By volunteering to pay tax on $5,000 in the year
you received the stock, you reduced your overall tax liability
by tens of thousands of dollars.

Stock, not options:
Many option holders, seeing the beneficial effect the election can
have, wonder if they can make the election when they receive
nonqualified options. Unfortunately, the answer is no. These
rules treat you as if you didn't receive any property until you
exercise the option and acquire stock.

Each rose has its thorns

The section 83b election doesn't always work out this well.
If the stock doesn't rise in value after you make the election,
you've accelerated tax (paid it sooner) without receiving any
benefit.

Worse, you might forfeit the stock after making the election.
In this case you would deduct any amount you actually paid for
the stock (subject to capital loss limitations) but you get no
deduction relative to the compensation income you reported when
you made the election. That's a miserable result: the election
caused you to pay tax on income you didn't get to keep, with no
offsetting tax benefit later on.

When the election makes sense

The section 83b election makes sense in the following
situations:

The amount of income you'll report when you make the election is
small and the potential growth in value of the stock is great.

You expect reasonable growth in the value of the stock and the
likelihood of a forfeiture is very small.

Conversely, you should avoid the section 83b election where a forfeiture
seems likely, or where you'll pay a great deal of tax at the time of the
election with only modest prospects for growth in the value of the stock.

Don't miss this chance:
Sometimes an employee pays full value for stock in the company,
but has to accept a risk of forfeiture. The way this usually
works is the employee agrees to sell the stock back for the
amount he paid to buy it if he quits within a specified period.
This is a "risk of forfeiture" even though the employee won't
lose his original investment because he can lose part of the
value of his stock if employment terminates before a specified
date. As a result, the employee will recognize income when the
stock vests. You can avoid this result by making the section 83b
election. And it's free. The election costs nothing because the
amount of income you report is the value of the stock minus the
amount you paid, and that's zero. Failure to make this free
election can be a costly mistake.

Preparing the election

There's no special form to use in making the election. You
simply put the appropriate information on a piece of paper and
send copies to the right people. Although there is no required
form, it probably makes sense to follow the format of the
sample election published by the IRS.

Filing the election

The key point about filing the election has already been
mentioned:
it has to be made within 30 days after you receive the
property. If you don't act within that time you're out of
luck. Here's what you need to do:

Within 30 days after you receive the stock, send the election to
the IRS office where you file your return. (You can get the address
from
this
page on the IRS website.) We highly recommend sending this
election by certified mail and getting a stamped receipt with a
legible date.

Provide a copy of the election to your employer (the company that
granted the stock)

In the unusual situation where you had your employer transfer the
stock to someone other than yourself, you need to provide a copy to
that person as well.

Change in rules: Taxpayers were previously
required to attach a copy of the election to their income tax
returns. For transfers on or after January 1, 2015 this is no
longer necessary.